Europe lacks scope to revive economy

Times of London ^ | 02/04/08 | Rosemary Righter

[TigerLikesRooster]

Europe lacks scope to revive economy

Rosemary Righter: Economic view

When politicians start trotting out assurances that “the economic fundamentals are sound”, start to worry. If they add that “there is no need to rush for the lifeboats”, a quick check on the location of the lifebelts is in order - particularly if you entertain doubts about the crew's storm-management record. Back in 1997, my aircraft landed in Seoul at the very moment when the won went into freefall. Ministers and officials just kept parroting “sound fundamentals, sound fundamentals” right up to the moment when South Korea jumped into the IMF lifeboat.

Gordon Brown presented last week's “credit crunch” mini-summit with his fellow European G8 leaders - Angela Merkel, Nicolas Sarkozy and the just-defenestrated Romano Prodi - as a lofty exercise in global leadership: “We've been discussing how to maintain economic stability ... We believe we can persuade the whole international community of the need for the reforms we propose.” But it was the European Union's who gave the game away. “We can be confident. The fundamentals of the EU economy are sound ... Nobody is speaking about a recession in Europe.” The real point of this get-together was blame-shifting: global factors, not structural domestic weaknesses, were the problem; and Europe's leaders were hard at work heading off the risks of contagion.

This self-conscious parade of confidence at Downing Street was the reverse of reassuring - particularly when, on the other side of the Atlantic, the Federal Reserve was bluntly acknowledging the “downside risks” that had prompted its two-tier interest rate cuts. As politicians will, the famous five spent most of their time together happily designing bolts for the stable door - stronger regulatory frameworks, closer co-ordination, greater transparency in financial markets in general and credit ratings agencies in particular (to be secured, this being a European gathering, “by regulatory action if progress is not made”). Finally and inevitably, they issued a call for reform of “the global financial architecture”.

This is a particular buzzy bee in the Brown bonnet. His big idea is to turn the World Bank into an environmental lending agency (Prime Minister, did no one tell you the Bank has been in the environmental lending game for decades?) and to revamp the IMF as a global financial early warning system.

Talk about generals fighting the last war. Frameworks and mechanisms are loved by Mr Brown much as Lego is loved by small boys, but national responsibility for supervising large and complex economies cannot simply be sloughed off on the IMF. Yes, there is a need for greater transparency, to ensure that markets are better informed, and yes, regulators need to concert, as they already do at the Financial Stability Forum in Basel. But much of that “global management” rhetoric is posturing. When markets go into overdrive, they find ways round the controls set up in the wake of previous financial crises. The sub-prime crash and its accompanying debris came about because money was cheap, risk had become badly mispriced and bankers' incentives were skewed. Of this, most regulatory authorities were aware. So long as the going was good, you could have had the best global early warning system imaginable and it would not have worked because no one was listening. Call it the Soci鴩 G鮩rale syndrome. And why would one expect the IMF to pick up the Northern Rock danger signals that the Treasury and the Financial Services Authority both missed?

It is much more fun saving the world than fixing the plumbing at home. But the plumbing needs attention. On display, yet again, is the contrast between America's rapid financial reflexes and the semi-paralysis inflicted on most of Europe's governments by the surrender of their powers to set national interest rates and the scant fiscal leeway available to them. Despite the gloomy January jobs data in the US, the chances are that America's economic retrenchment will be painful but shorter than seemed likely before the Fed acted and Congress rushed to supplement rate cuts with a hefty fiscal stimulus. There is little, by contrast, that most European governments can do to reverse the steep slides in consumer and business confidence that Eurostat is already recording.

With headline eurozone inflation hitting 3.2 per cent in January, the highest for a decade, and with strong upward pressures on wages in Germany and France, little mercy can be expected from the European Central Bank, while public debt and deficits are already too high in the major economies to allow for significant pump-priming. So far, so familiar. But this time there is no room for British schadenfreude, because the British economy is also running out of road.

As Chancellor, Mr Brown's favourite boast was “no more boom and bust”. It will haunt him from now on. “Prudent” fiscal policy, which he claimed almost to have invented, is about saving in sunny seasons against a rainy day. It is starting to rain hard. And Mr Brown has not been saving. The public finances are as sick as a soaked parrot. Alistair Darling has medicine ready, but it risks choking the patient.

Over the next five years, public spending is set to fall to an eight-year low as a proportion of national income, while taxes rise to a 24-year high. The Treasury's goal is to move current spending into the black in 2009-10, meeting Mr Brown's famous but shopsoiled golden rule about balancing current budgets over the economic cycle; and to keep public debt below 40 per cent of GDP, the other Brown golden rule. No less than 48 per cent of the “proceeds of growth” will pour into government coffers. But this assumes that the “proceeds of growth” will hold up, as taxes rise and public spending falls against a background of sagging house prices and weaker tax revenues from the City. The Institute for Fiscal Studies, which bases its estimates on the Treasury's own economic models, pointed out last week how unlikely that is. Its conclusion: to meet Treasury targets, Alistair Darling would need to raise taxes in next month's Budget by £8billion. For political reasons, he will not do it, and for economic reasons, he should not. But not even Gordon Brown will dare to repeat for much longer that Britain's economic fundamentals are sound.

[LjubivojeRadosavljevic]

Government always has the best interests of its citizens at heart, right?

Well, yes, the Harvard people would say that's true. For example, see John Kenneth Galbraith or John Rawls on the theory of a Social Welfare Function.

What is wrong with you?/s

[RSmithOpt]

My bad....I forgot....got to have a Harvard eduction and drink Latte’s for $7.50 ea. in order to understand that social welfare functions brilliantly in the Land of Utopian Warm Fuzzy. /s

[jiggyboy]

Gordon Brown presented last week's “credit crunch” mini-summit with his fellow European G8 leaders

I hope I'm not insulting anybody's intelligence here, but it's become clear to me that "credit crunch" is, whether they know intend it or not, a euphemism for "the logical endpoint of Central Bank cheap-money schemes".

[Sawdring]

Does anyone have faith in a 50 year study? Imagine predicting what US economic output would be in 1982 when you are mired in 1932 pre-war Great Depression.